Keith Woodford has a close look at on-farm strategy, tactics, and the Lincoln dairy farm

Keith Woodford has a close look at on-farm strategy, tactics, and the Lincoln dairy farm

By Keith Woodford*

We all know that the current season is very stressful for New Zealand dairy farmers. What is not so evident is whether farmers are making the right decisions.  I am seeing increasing evidence of some poor decision making down on the farm.

In early October, I was driving home to Christchurch from the Mackenzie Country. On the way I passed many dairy farms. I was surprised, particularly in South Canterbury, to see lots of predominantly light green pastures, with dark green urine blobs therein. I was looking at pastures that have not had any nitrogen since last season.

Back in the old days. when clover flourished and pastures were clover-rich, the lack of fertiliser nitrogen may not have mattered. But this spring it does matter.

These sights confirmed my concerns that many dairy farmers are desperately trying to cut costs but are getting it wrong. In discussions with industry people whom I trust, I am hearing stories of financial advisers who are focusing on short term cash flow without an adequate understanding of cow and pasture biology. I am hearing that there were lots of metabolic problems at calving.  I am seeing people who seem to be changing their overall system to deal with short term situations. And I am seeing the consequences of failure to recognise that there is both a numerator and a denominator to the cost of production.

So on Thursday 8 October I attended the Lincoln University Dairy Farm (LUDF) Focus Day to see what they were doing and how they were faring. I came away from the day mightily impressed.

Given my own long time association with Lincoln University, I need to make it clear that I have no role in the running of this farm. However, way back in 2000, on coming back to New Zealand after almost twenty years working overseas, I was part of a committee, chaired by Farms Director Tony Whatman, that was given a brief to consider the alternative irrigation designs. I think we got that correct with a decision to invest in centre pivots.

Looking back now, the centre pivot decision seems obvious. But at the time there were only a very few pivots on dairy farms.

I also had many discussions in those early days with the late Bill Kain about his governance proposals, which essentially involved getting the decision making out of the university system, and getting industry groups involved. I was not confident that Bill’s governance strategy would work, but in large part it has.

Since those times, I have spoken at a few focus days on various topics, but I have had no direct involvement in the farm. So I came to the focus day as an independent.

To put it in a nutshell, the LUDF management team is doing a great job this year.

The above photo shows Dr Racheal Bryant explaining the management of tetraploids and gibberrelic acid at the LUDF focus day

The winter was cold and wet, and the spring came about three weeks late. But the cows have peaked at 2.5 kg milksolids per day and are on track to do 500 kg for the season. Of course there is still a long way to go. But the cows are in excellent condition with average body score of about 4.8 and they have been holding well.  For an all-grass farm, apart from some bought in silage and off-farm wintering, this is mighty impressive. Everything is humming along and farm working expenses should come in at about $3.80 per kg milksolids.

With a milk price now expected to be about $4.60, plus a dividend of say 25c, and livestock income of about 50c, then overall cash income should be about $5.35 per kg milksolids.  That leaves a cash surplus of about $1.55 per kg milksolids for finance costs.

Compared to the boom years, these figures are far from great, but in the current world where cash is king, LUDF is trucking along nicely. LUDF still needs working capital, but the operating cash flow should be positive by February.

It is notable that whereas Fonterra is reporting nation-wide production down eight percent from last year, the production at LUDF is actually above last year. My dairy farming mates, who have also figured out a long time ago that hungry cows always kick the owner in the back pocket regardless of payout, are in similar situations. They are saving costs wherever possible, but not at the expense of production. Like LUDF, by spreading the fixed costs across good production figures, they are keeping farm working expenses to well under $4.

How are they doing it?

There was discussion amongst experienced farmers and rural professionals at the focus day as to how LUDF is achieving its current performance. The simple answer is that LUDF has both a clear long-term strategy and also a coherent set of tactics. And they are not muddling up those two.

A key element of the LUDF production strategy is that cows have to be well fed within a pasture-based system. One way they are doing this is by a focus on maximising the metabolisable energy (ME) value of pasture by use of tetraploid grasses linked to a regular pasture renewal program. These last few weeks, the pasture has been between 11.8 and 12.3 MJME/kgDM.

At the end of last season, LUDF dried off the cows with pasture covers of 2200 kg dry matter per hectare. The plan was to try and winter about 20 percent of the herd on the milking platform, but it soon became obvious that pasture covers were slipping. So they shipped those remaining cows off to a grazier, despite the additional cost.  Then, with the cows due back on farm in late July, it was obvious that grass covers were still inadequate as a consequence of the cold winter. So additional grazing was purchased for those cows that had not calved. Yes, that cost additional money, but getting the biology right came first.

A necessary rethink

Up until 2011, the dominant mantra from the LUDF was high stocking rate and high pasture utilisation. With hindsight, the stocking rate got too high at about 4.3 cows per hectare. Overall production was essentially static at about 1700 kg milksolids per hectare, despite high nitrogen applications.  Then in 2010/11, per cow production dropped from a long term average of about 420 kg milksolids down to 395 kg and production per hectare dropped that year to 1653 kg.   Clearly a rethink was necessary.

The need for change was reinforced by increasing recognition of the nitrogen leaching that occurs from cow urine. So the new focus was less nitrogen fertiliser, less cows, and hopefully more milk per cow.

Less nitrogen and less cows is easy to both say and do, as long as you are not too worried about the back pocket. But getting more milk per cow needs not only a new set of decisions but also some good decisions.

Production per cow has indeed increased, reaching 498 kg per cow in 2014/5.  With stocking rate down to 3.5 cows that year, production per hectare reached 1742 kg.  This current year, stocking rate has again been planned at 3.5 cows per ha and the target is 1750kg/ha milksolids.

Nitrogen leaching

If profit were the only consideration, then it is possible that the stocking rate has gone below the optimum.  But nitrogen leaching is also a key concern. Based on the latest version of Overseer (V6.2), nitrogen leaching has come down from about 50kg per ha to 35 kg.  If Eco N were still available, the improvement would have been greater.

The current LUDF output is the consequence of a whole raft of decisions that have come together into a whole system. I have already mentioned the tetraploid grasses and a structured pasture renewal program, which is linked to a management regime that allows these grasses to maximise both yield and quality. A carefully structured animal health and reproductive program has also been important.  And as one of the management team emphasised, there is a huge amount of monitoring that goes on, with tactical feed management decisions being made daily.

In some areas, Lincoln has cut down on inputs this year.  This includes less superphosphate.

Long term, phosphorus inputs must be kept up, but short term savings can often be made, and that is the case at Lincoln where the Olsen P levels are strong. Similarly, the pasture renewal program has been reduced for this year. That too is OK, as long as it is just short term.

Don't panic

There is more than one way to manage a dairy farm.  So the specific production targets and decisions that have been implemented at LUDF are not necessarily the best path forward for everyone. But the key messages from LUDF and other top farmers are not to panic when times are tough, and not to throw out the baby with the bath water.  

Tough times are when you need a clear strategy already in place and a long-term focus. Then it is a case of close monitoring and adaptive decision making at the margin to ensure that the cows are never going to be hungry. Once cow condition gets down, then everything else starts going wrong. And the impacts of that are long term.

I am sure that the LUDF system will evolve further. This season the 15-month heifers will be naturally mated because the grazier does not have adequate yard facilities for artificial insemination. That situation will clearly need to be revisited, because the 15-month heifers are the cohort with the greatest genetic merit.

Also, there will need to be further discussion as to whether an N loss of 35kg per ha, which excludes the losses over winter on support land, is acceptable long term. In that context, the LUDF soils are much less leaky than much of Canterbury, and if the LUDF system was implemented elsewhere, then the losses would be much higher. But that is a topic for another day.

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Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. His archived writings are available at http://keithwoodford.wordpress.com

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Great article Keith - helps me as a non-farmer understand some of the issues. Is the student labour counted at $0/hr in the operating costs?
The Nitrogen leaching issue is huge - its impact on ground water can not be great. I am of the view that degredation of the commons needs to be paid for by the polluters - seems animals are creating methane AND killing the ground water so they obviously have a cohesive plan to kill off humans........

Keith, I agree with you regards poor advice being given to dairy farmers but not with your key message from LUDF.

LUDF is where it is as a result of a contest of ideas over resource allocation and stocking rates. On one side of that was sophisticated LP
modelling of resources indicating higher profit from significant reductions in stocking rate. On the other side were industry standard
models backed by DairyNZ and our universities that use averages. Iterations of both were tried and the LP model proved far superior.

The key message from LUDF is proof of the win win of higher profit AND lower nutrient losses possible from lower stocking rates.

The win win that DairyNZ claims is impossible.

LUDF have described "what" they have done, but they have avoided "how" they arrived at this optimal farming plan.
The journey of LUDF from a productionist model to a profit model must have involved some decision process to know how far to retreat from the "more cows - more milk - more profit" mantra of industry total production promoters.
The "how" that Mr Woolford has missed describing is the technique to identify each farmers optimal production objective for the best mix of resources for maximum farm profit under the agreed N leach cap.
Farmers are lost in a sea of advice from the beneficiaries of their production and have forgotten that it is a farm managers responsibility to know the point where the application of further resources is damaging farm profits and the environment more than it is contributing at the margin and cease participating in the productionist folly.
Is the development of such an important management concept beyond the capabilities of NZ's current Ag Universities?

Is the development of such an important management concept beyond the capabilities of NZ's current Ag Universities?

I thought Agresearch and Lincoln were between them given a million dollars to answer that question. I have never seen any outcome.

Massey University did teach management concepts that included marginal analysis. This is important for comparing options but has been replaced by simplistic models based on averages. Averaging precludes any ability to identify when to cease adding inputs - when the marginal costs of the additional input exceed the associated return. Most bought in feeds are now in this category.
LUDF were advised on how to put in place the SYSTEM that changed their farm around yet management (and Keith Woodford in this article) do not appear to understand the methodology upon which this very profitable advice was based.
As Colin Riden has observed, this comes as no surprise as many in DairyNZ rely on averages through DairyBase and refuse to acknowledge that "Win Win" (economics and environmental improving together when correct resource allocation can be defined) is possible despite increasing numbers of farmers beginning to realise it is.
The production = profit myth seems firmly embedded and is best illustrated with recent irrigation and "System 4 and 5" intensifications.

In response to the above commenters:
It would take more than a response comment to address all of the above issues. But let me first say that I have been using LP for some 44 years and indeed co-authored a text on the topic some 30 years ago. So I have a reasonable appreciation of the strengths and weaknesses of the technique.

I agree that much of the systems advice from DairyNZ would benefit from a stronger production economics perspective. However, economists also have to make sure that they understand the biology.

A further key issue is that most economic analyses are undertaken within a static framework. Accordingly, trying to chase the ideal point of MR=MC tends to mean that you are hitting last year's price (or the year before that) rather than this years price. Hence, the emphasis on minimising average costs within strategic management when faced with volatile environments. And hence the importance of distinguishing between strategy and tactics

A further point for consideration is that on most of the farms that I am associated with, MC is less than average cost (AC). Accordingly, reducing inputs raises AC. This is exacerbated once finance costs are included. And still further, on these farms MR is greater than MC even at this year's prices. In other words, marginal revenue is contributing to fixed costs.

I do not think it is helpful to characterise recent changes at LUDF as being simply a reduction in stocking rate. There have had to be many other changes to the system to elicit the higher production per cow (and thereby make the lower stocking rate economically attractive) and also to lower nitrogen leaching. Incidentally, the new system has not actually increased profit on a constant milk price basis, but it has essentially managed to retain profitability while lowering N losses. And that is an important step forward.

As for the way these things are taught within universities, I can only speak for what I myself say and do. Part of the reason that I moved on from Lincoln University (apart from an Honorary position which includes post graduate supervision plus some pro bono lecturing, is that I did not agree with some of the current managerial frameworks and how they impact on education itself.

The LP model used to optimise LUDF production ties together detailed biological models.

I agree this site is not a good place to have this discussion but at the moment I am not aware of anywhere better.

I am confused by how your farms are operating at points where their marginal cost curves are less than their average cost curves. That implies they use higher cost dry matter first and can find lower cost dry matter as they intensify.

Before making such sweeping comments about bad decision making, it might be appropriate to hail mother natures cold and miserable spring. For those of us that do the farming, and pay the bills, how easy is it eh for some bugger from their warm dry office to tell us how we really should do it. Personally I am running less stock units this year, biffed on heaps more fert....yet everything is doing it harder. Keiths figures take no account of good seasons and bad. Really seems like a lot of bravado and nonsense. Lot of guys out there hurting Keith, having a pissing contest about how well a well funded bunch of nerds are smashing it out of the park just seems inappropriate.

I am surprised by your attitude here Belle. NZ's dairy industry generally gets poor economic advice that does great harm but you attack Keith for expressing that message.

Worse, efforts are in train to ensure that poor economic advice is not exposed to contest from better alternatives:

http://nzipim.co.nz/Folder?Action=View%20File&Folder_id=113&File=DFS%20A...

Jeepers Colin I think your link sums up perfectly the pressures our dairy farmers are under. If it takes all that to advise one, how must it be on the end of that advise. Perhaps I missed the point of Keiths column. I felt it was directed at farmers themselves. My apologies to Keith if it was bailing up the bankers accountants and consultants.

Pretty horrific stuff Belle, and paid for from dairy levies. You need to know all the fundamentally wrong agribusiness bullshit about benchmarking, KPIs and wealth creation that preclude every farm from being different and every owner/operator having different objectives. And none of the ag economics and farm management that reduces risk and optimises profit.

Mitre was close to the mark:

Farmers are lost in a sea of advice from the beneficiaries of their production and have forgotten that it is a farm managers responsibility to know the point where the application of further resources is damaging farm profits and the environment more than it is contributing at the margin and cease participating in the productionist folly.

I wonder how much the intense rivalry in the dairy industry contributes to the ridiculous suicide rate. Nobody seems to take into account that each farm is very different. Soil types, rainfall, contour, height asl, etc etc yet the pressure to have the most production per hectare, ms/cow, tonnes fodderbeet/ha it goes on and on. It is meaningless drivel.

HI Belle, I've started killing, just a handful yesterday but a unit next week. Truck was full and the driver told me all three of us with bulls on truck wanted to put more bulls than allocated on.
We are seriously dry now, my hills will start to brown off soon, no rain and very little feed. Some are better off than me as I missed a lot of the heavy rain a month ago. Looking out my window everyone in the valley is short or very short.
Grapes have been a bugger with all the frosts and latest I've ever seen them.
Manufacturing beef fell badly this week in the auction in Nth California, I just don't know how relevant it is to our market but like I said last week, my friend sold weaners 6 months ago for $1700 that last week he only got $900 for.

Here s what your new neighbours will do to the environment.
http://www.stuff.co.nz/environment/72377723/horrible-conditions-at-troub...

Some processors dropped 10c this week. Could be a flood of cattle soon. Blowing a gale here.The link is a bit sad Aj. We are all guilty some more than others. Farmers that is. Our phosphates on the hill country cant be ignored. Factory dairying is icing on the cake. (Plus whipped cream and choccy sprinkles and hundreds n thousands) I see the link looks like young angus bulls.

I salute Belle's sage advice about ignoring sweeping generalisations. LUDF is one type of farming, in flat land, with particular soils. There are other configurations possible to handle N etc. leaching, the most obvious being barns and total capture/treatment/usage of the effluent streams.

One overall possibility for actually Measuring and thus starting to Manage effluent, is the Trillion Sensor movement (roadmap: http://www.tsensorssummit.org/Resources/TSensors%20Roadmap%20v1.pdf). If trillions of sensors can be used to measure, then software developed to predict, and management techniques developed to use those predictions, for such things as pasture nutrient leaching, water quality, etc, it would seem to be a natural fit for NZ Ag Science and Research to go full steam ahead. However, I wouldn't bet the farm on this happening.... too many siloes (sorry, bad agri pun).

In response to multiple comments above:

First, I don't think that comments about 'nerds' , and 'pissing contests' actually takes the debate forward. The role of farms such as LUDF is to explore the boundaries. And that can lead to good debate as long as we stick to the issues.

Of course, LUDF is not the only farm that is doing a great job. Most of my dairy farmer mates are coming through this season well as a consequence of 'spot on' decisions. One of my mates told me this morning that he is back doing discretionary maintenance and capex from cashflow.

The group of farmers I have most sympathy for are the lower order sharemilkers. Some of them are really doing it tough, without adequate financing in place. And if farm owners are bloody-minded in relation to their lower order sharemilkers then all parties suffer.

In relation to an earlier comment, there was a question about LUDF's decision-making process in regard to the change in their system (which has now been occurring in steps over several seasons). My understanding is that they have been influenced by work coming out of the Pastoral 21 program which had showed that less cows, more milk, and less leaching was feasible under a specific management regime. Of course there is always a considerable step moving from a small farmlet to a full scale farm and making the overall system work. And there was no guarantee that the cows would do what the managers hoped for.

Fonterra has now advised that September production was down 9 percent. Much of that is linked to the difficult spring. I was in Southland during this last week and it seems that the season there has finally turned and that there has been good growth there in the last two weeks. Canterbury is holding up well, but there are lots of westerly winds. I will need to check with my North island mates as to the latest information on their spring.

I tried to make the point that the specifics of LUDF, including per cow performance, are not going to be the KPIs for many New Zealand farms. Each region is different and so are both the strategic KPIs and the tactical responses. The key messages which can be generalised are :
1) hungry cows always kick their owners in the back pocket,
2) dealing with tactical situations (such as a cold winter and late spring) through overall system changes is not a good way to go.

Colin Riden has suggested that a situation where marginal cost ( MR) is less than marginal revenue (MR), and MR is also less than average cost (AC) implies that the last units of feed are not the most expensive units of feed. My response is that it does not imply that. What it does imply is that at least in the short run( i.e.for tactical decisions) most costs are actually fixed costs. We also need to remember that minimising MC is not the name of the game.(I have seen a diabolical DairyNZ presentation where that was implicit to their flawed reasoning.)

To use an example. The marginal ME requirement of 1kg milksolids is about 80MJME. For N-boosted pasture, and assuming a response of 110 MJME per kg of N ( i.e. about 10kg DM) and a urea price of then $625 per tonne then it costs about $1 to obtain an extra kg milksolids. Similarly, with PKE at $200-$250 per tonne then it costs around $2 per kg milksolids. The key point is that MC

Alas, the last comment got truncated and therefore the explanatory examples have been lost!

Keith, I appreciate nerds taking things a bit far. But rereading your column you dont really hold back yourself. Poor decision making is so easy to say staring at a farm from a distance. What lead to those decisions you are not privy to. Many would have had their hands forced by finances. I am always amazed at farm managers and workers who berate the owner for not doing this and not doing that. Usually this involves spending money. When you are standing in the owners shoes dealing with pressures from bank managers , families, mortgages and flat out exhaustion, and a sense of sometimes just being over it, then perhaps you can attack their decision making to your hearts content. This 7 day a week 365 a year busness of farming is no walk in the park. I am quite sure Lincoln has a committee of fuzzy heads to ferret out the answers. Get it wrong and who pays....no one. So this poor decision making I can guarrantee you has probably seen more blood sweat and tears than you are giving credit for.

Belle, so now the 'nerds' have become 'fuzzy heads'. But I do agree with you that there are lots of pressures in dairy farming. My opening line in the original post was about the stresses everyone was facing this year. Hence the importance of getting strategy and tactics sorted out. The evidence from the current season is that some farmers have got that worked out much better than others. My dairy farming mates tend to be people who have seen the lows and highs over many seasons, and as survivors they have worked out how to manage the lows. However, another generation is facing these difficulties for the first time. Some are handling the situation well, but others are clearly doing things that are compounding their difficulties. It sure is not an easy business. As my Australian mates used to say when I lived over there, when you are up to your backside in crocodiles it is not the time to think about draining the swamp.

'Failure to recognise that there is both a numerator and denominator to the cost of production' I would bet Keith there is plenty of recognition. However at a $3.85 payout and an overdraft sky high the swamp has to be drained. Thats your failure of understanding the reality of business. Sometimes there is no money. Nada, nothing, zip. You throw the dice and leave it to mother nature. Unfortunately it looks like she didnt come to the party. Now if bank managers knew now what they didnt know 2 months ago there may have been leeway for some. Get a grip Keith. This isnt about what farmers dont know. This is about budgets to hell and gone. Unsustainable budgets. Panic. The payout looks possibly way different today. The decisions you are criticising had nothing to do with $5.35. I have to stand up for my fellow farmers here. Fonterra has pampered their suppliers. Until last season it was like being on a salary. Well that salary got cut off back in may. Its usual for us dry stock farmers to go without income for months on end. This is not usual for dairy farmers. Yes Lincoln sees a feed deficit so gee we will send the cows off farm for a month. Hell things arent coming right, we will leave the later calvers there. While you champion such marvellous decision making. I see farmers looking at their bank statements literally weeping and wondering if they will still be farming next season. Oh so wishing they too could wave bye bye to the girls for a month or two.Fuzzy heads or nerds you are seeing the trees not the forest. Um Mr Westpac can i please have another $200 a cow. Yes I know I already owe you more than I can ever repay but you see Lincoln University said blah blah blah so it will all be fine sir. Keith if all us farmers could afford to get our stock off for winter we would all do amazing production in these first few months of spring and perhaps make an extra dollar. The obviousness of it astounds me. The lincoln boys have really hit on something there. Their genius knows no bounds. The rest of us are just dumb bastards like you imply.

As a long time Canterbury dairy farmer with many scars from bankers ,weather and the market I can understand KW's frustration at trying to get his message across. I wish I was a mate of his,he talks good honest common sense and also seems to know the ins and outs of LP,a subject that lost me back in 1974.
I learnt many years ago that reducing key inputs in a downturn is a disaster waiting to happen . Dark green urine patches in a sea of yellow is a recipe for disaster and haunts me to this day.
many irrigated dairy farms around here are doing better than Lincoln,because the committee is smaller. You must be farming in a crap area belle ?